Readers of Frank Herbert’s Dune series would be familiar with the Spacing Guild.* In the series the Guild are, more or less, parasites and maintain their position through a monopoly on interstellar travel. At the same time they are addicted to the spice that is only available on the planet Arrakis (Dune). In the story they do whatever it takes to maintain the supply of the spice – hence the phrase “the spice must flow”.
This phrase occurred to me during the week as I read story after story in the AFR either written by financial market economists or interviews with financial market economists on how the US government shutdown and/or default would constitute the very end of human civilisation, if not worse.
First of all, it isn’t clear that the US would actually default as we know the US government actually has the cash on hand to pay interest as and when it falls due. Certainly the US government would have to prioritise some of its spending and that may prove to be a challenge to bureaucrats who are used to a very soft budget constraint.
Second I’m not convinced that having the US government rein in its spending is a bad thing either. They are running a huge budget deficit and the forecast budget path is unsustainable. If there is no political appetite for increased taxes then spending needs to be cut.
Our financial market friends, however, have an addiction to public debt. So for them a reduction in public debt levels is likely to be a problem. Indeed some of them might even go broke. Tough. As long as politicians don’t fall for the “too big to fail” fallacy that shouldn’t be too much of a problem. Here is the thing – we know that value is created by entrepreneurs who generate economic activity resulting in cashflows. Financial institutions slice and dice those cashflows and repackage them and on-sell them and so on. That’s all fine and I don’t want to give the impression that financial markets aren’t important – but I’m not convinced that feeding an addition to public debt is necessary for economic prosperity.
* The original series is highly recommended – the sequels written by Herbert’s son are woeful and should be avoided.